Retail portfolio observations and predictions

The author, who delivered a dinner address during RMA's annual Retail Risk Conference in June, remains convinced that "while there is always opportunity in any environment, today's market is unique, with big opportunities to grow." In this article, based on the address, he explains how what appears to be a difficult time for consumer banking is, upon closer examination, a very volatile marketplace. The answer to getting and retaining wary customers is out there ... somewhere.

There is a blessing--or is it a curse--that, I have been told, comes from China: May you live in interesting times. The ancient Chinese had a pragmatic touch in their way of life. I went to China two years ago. One of my favorite images from that trip is a statue of Confucius in his hometown garden. He stands with two manbeast "associates." The first is the interpreter, who knows all the languages of heaven--kind of a forerunner to Star Wars' C3PO. What a great notion. I assumed every one in heaven spoke English, just like here on Earth. Or perhaps everyone communicated through telepathy. But isn't it more fun to imagine a multilingual heaven? I think so. Then there is the other statue: Confucius' bodyguard. Even in heaven there could be a tiff or two and it's better to be prepared. This view of the universe could certainly thrive in interesting times.

We Americans are more ambivalent about something being "interesting." If I say to you I just read an interesting book, you would probably get excited and ask me about it. On the other hand, if you told a friend that you had an interesting blind date last night, it would be universally recognized that "interesting" means no second date.

But we do live in interesting times. The events taking place on the financial landscape during the past few years present tremendous opportunity for the bold, the creative, and the knowledgeable. We have witnessed many assaults on the public trust--from accounting giants who suggested and signed off on questionable practices, to broker-dealers who touted IPOs and other companies in which they had other undisclosed interests. With so much to gain and so little to lose, they put out figures they knew were false. Commercial banks lent to these companies with enthusiasm, because money was flowing and no one wanted to sound the alarm. In the process of pursuing wealth for the few, we crushed the aspirations of the many. The foundation of our "contract" with customers was severely damaged. We lost the trust our customers had in us. Trust is a core value. It is the most critical asset required in our business. Without trust we are charlatans. We are the despised moneylenders, people who have been disliked and demonized throughout the ages. What happens when trust is lost in financial service providers? What happens when trust is lost in the companies that drive equity markets? The enviromnent changes. The field of competition becomes difficult and disrupted. Plenty of cynical consumers are created.

Yet here is the irony: People still need services. There are many people looking for companies they can trust. There is dissatisfaction on a high level. Seen correctly, it presents a once-in-a-lifetime opportunity. There are more customers in play because of these events than I have ever seen during my 20 years in this industry. As someone once said, "In the misfortune of our friends there are often events that do not displease us." Why is this the case?

Chutzpah

Broker-dealers are out there spending money on advertising, telling people that not only should they trade with them, they should make them their complete, one-stop bank. These are the same broker dealers who recommended stocks and other financial instruments to their retail customer base where they had huge conflicts of interest. These conflicts came either because of their existing investment banking business or their hopes for something later. Investors were not mildly bruised when the dam cracked and later broke. No, they got washed away. Now the mail delivers notices of class-action lawsuit settlements for pennies on the dollar to people who lost thousands because they trusted their brokers and the integrity of the companies they represented. I will admit one thing about these players. They've got chutzpah. "Sure we did you wrong, but all is changed. Come back and bring your relationship with you."

Do you folks know what chutzpah is? h is a Yiddish word that expresses both disgust and admiration. Audacity comes to mind, but it's not quite the same. The classic definition of chutzpah can be understood in a child who kills his parents and then asks for the mercy of the court because he is an orphan. Today we have companies asking for tax refunds because they lied about their profits. They inflated them for illegal gain, but now they want to refile and get their tax payments rebated. They need the extra cash to pay their fines. The IRS will pay the U.S. Justice Department, even up. That's chutzpah.

A lot of customers are unhappy about this state of affairs. There is huge potential to reconfigure the banking landscape. The companies that "get it" have the potential for large rewards.

Devolution

Then there is a second cataclysmic shock in the financial services system: the collapse of the airline industry. Now I myself never understood the economics of airlines. I only knew I paid the most for my place on the plane and the standbys got better seating. Now all the majors are in or near bankruptcy--United, American, USAir--and some are even being fleeced by their own senior management team.

The connection may not be obvious but the airlines, because of their troubles, are the second major factor putting huge numbers of customers in play. The situation in the airline industry puts in jeopardy one of the most successful marketing promotions ever conceived: the frequent flier miles program. No other program ever changed the behavior of businesspeople like this promotion. Meeting sites were changed. Times were changed, choice of airlines and routes were changed: anything to get points. Credit card partners were lined up. Certainly United and American are two of the best programs. Those programs built loyalty. They were and are important to their banking partners.

Now these same point-holders are unsecured creditors of bankrupt and the near bankrupt airlines. Customers understand what they could lose. They are going to Paris for the weekend just to use their miles ... and taking their friends! Will the low-cost airlines, who along with 9/11 and the recessions that put our major carriers on the brink, take over point programs? Well, maybe, but you can be sure they will not be the same: not as generous, not as flexible, not as "storable."

Playtime

These two sets of events--the assault on trust and the devolution of the mileage programs--have created widespread concerns. As a result more customers are in play. More in play today than at any time I can remember. Loyalty is out the window. Share is up for grabs. Can we be a leader today when we were not in a leadership position the last time there was so much share in play?

Customers in play are a huge opportunity. One of the most difficult roadblocks to share-building has already been breached. You don't have to convince customers they need a change. They already know it. There is a chance to gain trial and usage and build loyalty.

How can we, as banks and other providers of financial services, exploit the complex field that is today's economic landscape? Make no mistake: It is dangerous out there. But there are unprecedented rewards for some waiting to be found. What roll can we as risk managers play? What new skills are needed?

Innovation

It always helps to go back to basic, core principles when life is changing. For me the most fundamental question is the one that asks, "What business are we in?" One of the best marketing articles ever written is Ted Levitt's Marketing Myopia--now more than 25 years old. Knowing what business we are in provides the path toward creating successful offerings of products and services that are meaningful for customers. Today's customers have been changed by the events of the last five years. The successful players will be those who respond to the changing needs of consumers.

Bankers are notoriously bad at knowing how to answer this question of business definition. Bankers like to talk about the commoditization of financial services. They say everyone has checking accounts, loan products, and credit cards and that one bank's offering is like another. But is that our business? Is that what we are all about? I believe that if selling checking accounts is all we are about, we will wither on the vine and become irrelevant, replaced by service providers who understand the real story.

We are not selling money, or CD rates, or mutual funds. We are selling hopes and dreams. We trigger emotion like few other products that exist. Money may not be the root of all evil, but it's a key component in many defining moments in one's life, good or bad. And people want to trust, they want to feel safe again. So we must shore up the old and start to develop the new. The creative will figure out how to bring in the new customers who are out there waiting. The innovative will figure out how to keep them. What will the successful new products be? If I knew the answer to that question, I would not be here speaking for free. I will let your advertising agencies and marketing departments and maybe your law departments figure out the creative part. But when it comes to innovation, I can give you some ideas to consider.

The many, the egocentric, the gray. First, follow the boomers. This cohort has changed every consumption and cultural norm, as they marched like Sherman to the sea across the demographic landscape. We know they are a fun-loving group with a sense of entitlement. Most think they deserve to have it all. They (we) also like to believe we can remain forever young. I suspect the discovery" of the fountain of youth is still a bit into the future. But the cities of gold will be constructed for those who put the hope out there: The boomers want to look good forever and the weight-loss people, the face-changing products, the plastic surgeons, and the wonder pills are just the tip of the iceberg.

What are the financial factors that go with these shifts? How can we measure risk and develop the confidence to lend out money for new products and services? One thing I am sure of is that we will have a different concept of cosigners and co-borrowers. We need to develop products that allow families to share the financial burdens of aged parents. In most cases no one child wants or can afford to carry" the burden of an aged parent alone.

The many, the guarded, the lifers. Despite some successes with new products over the past 30 years, we bankers do not usually announce, "We want 50% of our revenue to come from new products in five years." We chart excess capital and ask how we can employ it usefully, but that is not the same concept. We recently had a brainstorming session at our bank to discuss new loan products. There were close to a hundred product ideas generated, depending on your definition of an idea. Once the ideas were clarified, it was decided to move all the remaining ideas forward except for one. Whose idea do you think was left behind? Yes, you're right--mine. No one liked the idea of prison condominiums with prisoners as your target market. It is all based on recidivism and a more pleasant, safer prison experience. I even offered time-share so that people doing time in Florida in August could swap and do time in Maine instead. Now I admit the idea needs some work, but it's my view that if we don't push the edge of our thinking, if we don't move the mean further to the right or left depending on how you graph, then our compromises will produce mediocre solutions safe, outdated, and tired, with no acknowledgement that the future is on its way always.

Bobby sox and blue jeans. Look back to the fifties. For reasons that I do not pretend to know the boomers have chosen the fifties rather than the sixties as their nostalgia era. Take a look at Starbucks--what is it but an upscale Dunkin' Donuts? How about music videos and MTV? Sure, they represent use of new technologies, but in concept they surely follow in the tradition of Elvis movies. I have been watching Elvis movies lately, thanks to the miracle of 24/7 cable TV. My current favorite is Blue Hawaii. This movie, as with most Elvis movies, has the thinnest patina of a plot. The movie is like a series of Elvis music videos. Briefly, Elvis returns to Hawaii following his discharge from the Army, but doesn't want to tell his parents, who want him to run a plantation for some greedy corporate types. Instead, EP decides to move out to the beach with his beautiful Polynesian girlfriend. Off that story they hung about 20 Elvis songs, my favorite of which was sung when about 12 of his buddies show up in their Polynesian-style longboat. Elvis swims out to meet them, and they just happen to have 25 instruments, including one for EP. So: Search through the fifties with a fine-tooth comb and an open mind.

Paper, paper, everywhere. The open mind is critical. Have any of you seen the change that has taken place in the institutional paper-napkin business? The old paper napkin came out in rectangles from a metal napkin dispenser. This seemed to be doing the job, no need for a change. Well, what have we got now? Instead of napkin holders, we have toilet paper dispensers with rolls of napkins that you tear off. Can you imagine the courage of the person who pitched that to his boss? "Hey, chief, I got a great idea for a new way of dispensing paper napkins in lunchrooms." "Yeah, sure, tell me about it, I really want to hear this." So keep the mind open. Remember: It's not what you think, it's what the customers think, l may believe that a TV documentary on the making of the pilot of Gilligan's Island is what my friend Frank Gregg would call "TV consuming its own excrement," but that doesn't matter. It is what the customers want that makes all the difference.

Risks and Rewards

So, my friends and colleagues: What does this new world mean for our risk community? It probably means some serious revamping of our thinking and our techniques over the next few years. Whenever we see that the future is going to be dramatically different from the past, it puts our rearview mirror to the past in jeopardy until we readjust. I doubt that will be enough, however. I suspect we'll need new perspectives as well as new tools. I am confident that we will be up to the challenge.

These are extraordinary and interesting times. 1 hope the word interesting evokes for you the book rather than the blind date, because the short- and long-term changes are coming. It's a great time to be in our profession if you can see it. There has rarely been more at stake than there is today.

Alexander can be reached at steven_a_alexander@fleet.com.

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